Asset Management in the age of Disruption – Elephant in the room

Mankind was destined to live on the edge of perpetual disaster. We are mankind because we survive
James A Michener –Pulitzer award winner American writer.

If we slightly tone down the poetic expression of ‘perpetual disaster’ to ‘disruption’ or ‘disruptive change’, we realize that it is the survival spirit or quest for innovation and creativity – which has led mankind from Stone Age to the present Digital Age. Rapidly growing waves of digitalization – ‘electronifying human emotions, expressions and complex web of relations’ of recent times, have fundamentally altered every aspect of our lives. Besides introducing new and intricate norms of social values and behaviour, it has drastically changed our living pattern, demands and overall risk profile.  

Against this unprecedented background, let’s briefly take a view of emerging Asset Management infeatureddustry landscape – broadly summarized under following key points:

  • Rise in Asset size: Global AUM is expected to grow in a reasonably satisfactory way in coming period – particularly driven by pension and retirement fund reforms in the developing world as well as emergence of new generation of Sovereign Wealth Funds. As per PwC report of 2014[i] global AUM will rise to roughly $102 trillion by 2020 from $64 trillion in 2012, representing a CAGR of nearly 6 % (far above the global GDP growth anticipated during the period).
  • Continued quest for Alpha: While focus on passive and ETF has substantially increased considering cost benefits, quest for Alpha and active strategies by asset managers to outperform the market continues to drive the industry.
  • Increased focus on Alternatives: Alternatives no longer remain alternative or passive strategy for buy-side firms. It is increasingly becoming core of their investment strategies finding growing share of investment allocation.
  • Asia and emerging markets: Despite market challenges and infrastructural issues, Asia and frontier market remains centre of attraction. With slightly dampened return profile in developed markets, consistent allocation has been flowing in these markets to reap somewhat above average level of return.

Above outlook in an isolated sense tends to provide healthy sign of comfortable growth in the industry – suggesting enough space for everyone to grow in business as usual mode. However, if we closely look at it again through the prism of disruptive forces and changing customer expectations, perspective changes significantly[ii].

In one of his bestsellers ‘Bank 3.0: Why Banking Is No Longer Somewhere You Go But Something You Do’ – Brett King[iii] has highlighted about banks to exhibit agility and extreme sense of urgency to embrace changes and fulfil rapidly changing customer needs. Any laxity in timely response leaves them fully exposed to the perils of being irrelevant. It further emphasizes that in rapidly evolving digital age – with proliferation of communication channels and compounded customer expectations, innovation and experimentation are no longer an option rather it is the only way to do business.

Bringing above nuances in the present context, we realize that almost every aspect of Asset Management business – i.e. investment strategy, distribution model, customer on-boarding and engagement, information and service delivery architecture have largely remained frigid over years in its conventional form, without breathing any whiff of innovation. With disruptive changes dominating and unsettling the status quo realm in other industries, one significant question keeps us grappling as whether a full-blown disruptive model like Uber, airbnb or Skype really feasible in this industry? If so, what could be the nature and contour of disruption in Asset Management?

We may not have any definitive answers to it yet. Many of new generation ventures like Covestor, eToro, Motif, Indiegogo, lendingclub have brought their unique way of innovation – introducing remarkable ideas of social investing, mirror investing, social trading network, crowd funding, P2P lending in financial sector. In most significant example of disruptive business model in Asset Management in recent period, Alipay led Yu’e Bao Funds[iv] has completely reshaped the entire investment strategy and distribution model and in turn gathered a substantial business mass in China. At a relatively moderate level of innovation, firms like Robeco (Dutch) and Aberdeen (UK) have been experimenting with digital channels to enhance customer engagement and distribution efficiencies. However, given the wide span of Asset Management value chain and limited focus of Newgen/Fintech ventures, we are yet to witness a full-fledged radically changed business structure in this space.

Amidst evolving structure of the industry, with albeit sluggish level of change, five dominant macro level patterns, which characterize the futuristic view of Asset Management business in the coming period have been highlighted below:

1. Aggregation Services in Investment Strategy Management

 Looking forward, one shift certainly looks quite imminent– i.e. increased level of aggregation of services in DIY[v] investment strategy management. Traditionally being the core of Asset Management business, in all likelihood it will involve increased collaboration with new generation providers (or even competitors) to cater new and non-conventional product range. If trends like social investing, mirror investing or other similar innovative ideas in DIY sector further flourishes, it will give space to new breed of investment strategy aggregator platforms. A radical shift by all measures, it will also turn the sense of exclusivity and mystery surrounding of Investment Strategy domain and its rock-starisque asset managers into more plebeian and commoditized affair.  

2. Extension of Service Delivery Architecture

Another important point relating with business model is significant change in service delivery touch points – more so for asset managers catering to institutional investors. Shifting away from traditional model of service delivery architecture touching the door of its immediate clients, emerging service model would encompass the needs of ‘Clients of Client’ so as institutional investors are enabled with right tools, process and infrastructure to effectively engage their end customers.

More particularly, pension and superannuation funds, hitherto restricting to conservative set of offerings and limited information access to its investors would need to devise more intuitive way of customer engagement and self-directed service delivery.

Increased need to fulfil customer expectations on differentiated and more personalized level would require mass customization of each service. This essentially brings a new challenge to design agile processes and platforms, without affecting the cost and response time in meeting customer demands.

3. Self-directed Investment Management Lifecycle Tools

With large proliferation of hand-held devices/smartphones and universal internet, self-directed investment management lifecycle tools supported on-demand 24*7 service level will be a basic minimum to keep investors fully engaged. Some of these digital applications enabling Self-Service Capabilities Anywhere, Anytime are indicated below:

  • Product information and planning through intuitive visualization tools
  • Risk scenario based investment planning
  • Mobile enabled Trading & Portfolio rebalancing, transaction tracking
  • Mobility based payment/digital cash and linkage with bank account
  • Digital documentation, e-signature/biometrics and Automated KYC
  • Dashboard, Self-servicing and workflow inputs
  • Access to template based on successful social investment strategies
  • Sentiment analysis and predictive analysis
  • Virtual reality based Simulation and portfolio modelling analysis
  • Reporting for trades, positions, performance and costs

4. Multi-level Information Access

With ease of new channels and digital tools, retail investors would be keen to get customized on-demand information and investment analytics tools. Some of real-time portfolio analytics, investment value insights and decision support tools, which have been traditionally provided only to institutional customers and HNIs would find way to retail investors.

Besides transactional and position data access, investors would require on-demand, granular view of portfolio level data for better compliance and control. Multi-dimensional analytics with roll-up, drill-down, dissection and summarization abilities supported on visualization tools would generate huge data traffic for Asset Management firms. Towards fulfillment of mammoth information needs – with increased volume, velocity, value and variety of data, it would require a drastically different data management and servicing approach on the part of asset managers.

5. Internalization of Trading Technology

Realizing the ‘best execution’ has been one of the biggest worries for buy-side firms at all the times. Some of persisting concerns like – getting better deals for block trades, avoiding toxicity of dark-pools, gaining deeper insights of algos and better control on execution have led to increased internalization of trading platform by buy-side firms. Altering traditional design of OEM process, it would increasingly shift trading activities from sell-side to buy-side trading desk. Likewise, some of investment analytics and research tools (e.g. TCA, valuation), which have been traditionally provided by sell-side or third party providers would gradually start moving in-house. Of course, limitation of buy-side trading technology capabilities and sustained investment vis-à-vis sell-side firms would appear as a big question.

In somewhat related development, buy-side would start putting increased focus on cross-asset technology standardization and consolidation of systems and processes – largely leveraging the streamlined transaction processes and infrastructure realized for Equity and ETD.

 [i] http://www.pwc.com/us/en/press-releases/2014/pwc-global-assets-under-management.html

[ii] Asset Management stuck in digital ice age

http://www.ft.com/cms/s/0/61610e58-2bab-11e5-acfb-cbd2e1c81cca.html#axzz3wvFdDCkL

[iii] Brett King – famous Australian Futurist, Speaker and Author. He has written several bestseller books about future of Banking amidst evolving digital ecosystem – Bank 2.0 in 2010, Bank 3.0 in 2012 and Breaking Banks in 2014.

[iv] Yu’e Bao Wow! How Alibaba is reshaping Chinese Finance

http://www.institutionalinvestor.com/article/3346365/investors-sovereign-wealth-funds/yue-bao-wow-how-alibaba-is-reshaping-chinese-finance.html#.VpmpiLsVjrc

 [v] Do IT Yourself

 

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